Deck 14: Completing the Audit

Question 1

A legal representation is a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.

Answer 1

False

Question 2

FASB ASC Topic 450, Contingencies, provides accounting guidance for _______.

A)the accounting treatment for intangible assets
B)depreciable methods for property, plant and equipment
C)events, or potential events, that create uncertainty for a company
D)business combinations

Answer 2

events, or potential events, that create uncertainty for a company

Question 3

If, in addition to external legal counsel, the client also has in-house legal counsel responsible for litigation, claims, and assessments, a legal letter would NOT be sent to the in-house legal counsel.

Answer 3

False

Question 4

A legal letter refers to a letter_______.

A)of inquiry sent to the client's legal counsel
B)of inquiry sent to the prior auditor
C)sent to the Securities and Exchange Commission to advise of questionable accounting practices
D)sent to the client's internal audit function, questioning certain legal practices employed by the client

Question 5

An example of a loss contingency includes _______.

A)guarantees of debt of others
B)collection of accounts receivable
C)payment of accounts payable
D)repurchasing outstanding shares

Question 6

Estimating the amount of a loss contingency from a material litigation situation is not a critical accounting estimate.

Question 7

Analytical procedures during risk assessment may identify negative trends such as working capital deficiencies, adverse key financial ratios, and decreasing cash flow from operations

Question 8

A Type I subsequent event requires an adjustment to the financial statements.

Question 9

The Financial Accounting Standards Board (FASB) defines a loss contingency as _______.

A)an existing condition or situation involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur
B)an existing condition or situation involving certainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur
C)an existing condition or situation involving uncertainty as to possible loss that will ultimately be resolved when one or more future events fail to occur
D)an existing condition or situation involving uncertainty as to possible gain that will ultimately be resolved when one or more future events occur or fail to occur

Question 10

AS 1301 specifies that only critical accounting policies and practices must be communicated to the audit committee.

Question 11

The Financial Accounting Standards Board (FASB) defines a loss contingency as an existing condition or situation involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur.

Question 12

The likelihood of loss contingencies is considered reasonably possible when the future event is likely to occur.

Question 13

Analytical procedures may include ratio analysis, trend analysis, and other procedures.

Question 14

An example of a Type II subsequent event would be the bankruptcy of a client's customer after year-end as a result of poor financial condition that existed as of the balance sheet date.

Question 15

At the conclusion of the audit, auditors revisit the materiality level determined at the beginning of the audit to ensure it is still appropriate based on the results of audit procedures.

Question 16

As the audit is being performed, the engagement partner should conduct timely reviews of work completed on accounts, transactions, or disclosures that require extensive judgment or involve significant risks.

Question 17

If auditors determine there is substantial doubt about the entity continuing as a going concern, the next step is to obtain information about management's plans to mitigate or minimize the adverse effects of the situation.

Question 18

For public companies, the SEC (Securities and Exchange Commission) has strict deadlines for the filing of Form 10-K, which is the document that contains the company's audited annual financial statements.

Question 19

Attorneys and their clients have a _______.

A)confidential relationship
B)fiduciary relationship
C)privileged relationship
D)legal relationship

Question 20

Large publicly traded companies are under great scrutiny _______.

A)from the SEC only
B)from both the public and the SEC
C)from the public only
D)from the internal audit function

Question 21

Determining the likelihood of a loss contingency occurring and trying to estimate a reasonable amount for a future loss _______.

A)should be determined by the client's legal counsel
B)should be determined solely by the external auditor
C)should be determined solely by the internal auditor
D)involves significant judgment by management

Question 22

The financial statements are prepared by client management _______.

A)based on beginning of year financial conditions
B)for formal review and issuance of an audit opinion by the internal auditors
C)on the basis of conditions existing at year-end, which would be December 31 for a calendar year entity
D)on the basis of conditions existing at year-end, which should always be December 31

Question 23

An example of a Type I subsequent event would be _______.

A)a sudden change in senior management after the financial statement date
B)a filing with the Securities and Exchange Commission (SEC) of an amended form 10K after the financial statement date
C)the bankruptcy of a client's customer after year-end as a result of poor financial condition that existed as of the balance sheet date
D)the bankruptcy of a client's customer after year-end as a result of poor financial condition that existed after the balance sheet date

Question 24

If a loss contingency is reasonably possible or the amount cannot be reasonably estimated, _______.

A)disclosure should occur in both the financial statements and the notes to the financial statements
B)disclosure should occur in the financial statements only
C)only a disclosure in the notes is required
D)then no disclosure is required

Question 25

What is loss contingency?

A)An existing condition or situation involving uncertainty to possible loss that will ultimately be resolved when one or more future events occur or fail to occur.
B)An opinion expressed by the auditor when the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
C)Lack of confidence in the audit process that intended users place in the financial statements.
D)A statement in the auditor's report that is required by generally accepted auditing standards.

Question 26

The financial statements are prepared by client management _______.

A)on the basis of conditions existing at year-end
B)on the basis of conditions that existed at the beginning of the year
C)on the basis of conditions existing throughout the year
D)and sent to the Securities and Exchange Commission (SEC) for approval

Question 27

If management determines the loss contingency is probable and an amount can be reasonably estimated, then the company _______.

A)must record a liability and a related expense or loss, and disclose the relevant details of the event in the notes to the financial statements
B)must record an asset and a related expense or loss, and disclose the relevant details of the event in the notes to the financial statements
C)must record a liability and a related depreciation expense or loss, and disclose the relevant details of the event in the notes to the financial statements
D)should include a note in the notes to the financial statements but need not record an entry in accounting journals

Question 28

Type II subsequent events are those events that _______.

A)likely occurred before the financial statement date
B)likely occurred after the financial statement date
C)are unlikely to require adjustment to the financial statements
D)should be reported to the Securities and Exchange Commission (SEC)

Question 29

Attorneys and their clients have a ______, which means attorneys cannot talk about their client's cases to anyone without permission from the client.

A)privileged relationship
B)no permission agreement
C)confidential rapport
D)legal right

Question 30

The most common user of a private company's financial statements _______.

A)is a bank or other lender
B)are regulatory agencies such as the Internal Revenue Service (IRS)
C)are competing companies
D)are employees of the company

Question 31

Which of the following defines a legal letter?

A)An audit inquiry sent to a client's external and in-house legal counsel to obtain information about litigation, assessments, and claims.
B)A letter comprising the auditor's report that is required by generally accepted auditing standards or is included at the auditor's discretion.
C)A statement in which a CPA orders inquiry and analytical procedures to provide limited assurance that no material modifications should be made to the financial statements.
D)An engagement in which a CPA applies accounting and financial expertise to assist management in the presentation of financial statements.

Question 32

Auditors should carefully consider which of the following assertions for loss contingencies?

A)Existence
B)Presentation and disclosure
C)Completeness
D)Rights and obligations

Question 33

Auditors should be alert to subsequent events _______.

A)that may occur between the date of the financial statements and the date of the auditor's report
B)that may occur between the date of the auditor's report and the next balance sheet date
C)and report all immaterial findings to the Securities and Exchange Commission
D)as they are particularly important to the year-end closing process

Question 34

Which statement defines a Type 1 subsequent event?

A)An event that provides evidence of conditions that arose after the date of the financial statements
B)An event that provides evidence of unreported earnings that arose after the date of the financial statements.
C)An event that provides evidence of conditions that existed at the date of the financial statements.A Type I event requires an adjustment to the financial statements.
D)An event that provides evidence of conditions that did not exist at the date of the financial statements.A Type I event requires an adjustment to the financial statements.

Question 35

A Type I subsequent event should _______.

A)not require an adjustment to the financial statements
B)always require an adjustment to the financial statements
C)be disclosed in the notes to the financial statements only
D)should be referred to management to determine disclosure requirements

Question 36

A Type II subsequent event _______.

A)provides evidence of conditions that arose after the date of the financial statements
B)provides evidence of conditions that arose before the date of the financial statements
C)provides evidence of conditions that arose after the date of the auditor's report
D)provides evidence of conditions that arose before the date of the auditor's report

Question 37

Subsequent events refer to _______.

A)events occurring between the date of the financial statements and the date of the auditor's report
B)events occurring before the financial statement date
C)events occurring after the financial statement date
D)events occurring after completion of the audit and issuance of the audit report

Question 38

Which of the following is NOT an example of a loss contingency?

A)Payment of income taxes
B)Income tax disputes
C)Guarantees of debt of others
D)Threat of expropriation of assets

Question 39

A Type I subsequent event refers to _______.

A)an event that occurred after the date of the financial statements
B)an event that most likely occurred before the date of the financial statements
C)a contingent event, that may or may not occur
D)an event that is typified by debit entries to contra-revenue accounts

Question 40

A form 10-K refers to _______.

A)A form filed with the Securities and Exchange Commission (SEC) relating to changing of senior management
B)a firm's audited financial statements, sent to the SEC
C)a firm only filed with the SEC by privately traded companies
D)certain required income statement disclosures

Question 41

At the conclusion of the audit, _______.

A)auditors typically revaluate materiality decisions made during the audit to ensure it is still appropriate based on the results of audit procedures
B)auditors typically attempt to contact the prior auditor
C)auditors may attempt to contact the client's legal counsel
D)auditors ask management for recommendations on any needed adjustments to the accounts

Question 42

A form 8-K is used _______.

A)to file a company's audited financial statements
B)for management to report a change of auditors, and the reason for the change
C)for management to report a change of internal auditors, and the reason for the change
D)to disclose fraudulent transactions that have occurred within a company to the Securities and Exchange Commission (SEC)

Question 43

Specific audit procedures to identify subsequent events include _______.

A)obtaining an understanding of how management identifies subsequent events
B)reading the client's subsequent interim financial statements, if available, and other data such as budgets and cash flow forecasts
C)inquiring of the client's legal counsel regarding litigation, claims, and assessments
D)All of these answer choices are correct.

Question 44

Auditors report fraud _______.

A)to the Securities and Exchange Commission (SEC) within 72 hours
B)to a level of management at least one level above the level where the fraud occurred
C)directly to the manager that is suspected of involvement in the fraud
D)to the level below where the auditor suspects the fraud is occurring

Question 45

Type II subsequent events occur _______.

A)after the date of the financial statements
B)between the date of the financial statements and the date of the auditor's report
C)at the date of the financial statements
D)none of the above are correct

Question 46

During the risk response phase, _______.

A)all analytical procedures have been conducted
B)analytical procedures can be used, but are not required, as a substantive test to gather audit evidence
C)analytical procedures can be used, and are required, as a substantive test to gather audit evidence
D)the auditor should begin testing internal control

Question 47

An engagement quality control reviewer _______.

A)will review selected areas of working papers prior to the issuance of the audit report
B)will review all areas of working papers prior to the issuance of the audit report
C)should be impartial and chosen by the client's senior management
D)should be chosen from a different audit firm

Question 48

When the results of substantive procedures identify misstatements, _______.

A)the auditors refer the misstatements to the prior auditor for correction
B)auditors consider whether the misstatements may be indicative of the need to re-evaluate inherent risk, control risk or fraud risk
C)auditors consider whether the misstatements may be indicative of the need to re-evaluate inherent risk only
D)auditors consider whether the misstatements may be indicative of the need to re-evaluate control risk only

Question 49

An engagement quality control reviewer _______.

A)will review selected areas of working papers prior to the issuance of the audit report
B)will review all areas of working papers prior to the issuance of the audit report
C)is typically a person with minimal audit expertise and experience
D)should be appointed by the client

Question 50

What is Type I subsequent event?

A)An event that provides evidence of conditions that existed at the date of the financial statements.
B)An event occurring between the date of the financial statements and the date of the auditor's report.
C)An event that provides evidence of conditions that arose after the date of the financial statements.
D)An event that does not require an adjustment to the financial statements but may require disclosure in the notes to the financial statements.

Question 51

When evaluating the effect of uncorrected misstatements, _______.

A)only quantitative factors are considered
B)only qualitative factors are considered
C)both quantitative and qualitative factors are considered
D)neither quantitative and qualitative factors are considered

Question 52

Audit standards require auditors to _______.

A)conduct specific audit procedures to identify subsequent events that may occur up through the date of the auditor's report
B)conduct specific audit procedures to identify subsequent events that may occur after the date of the auditor's report.
C)apply optional use of analytical procedures to increase assurance levels related to subsequent events
D)delegate auditing of subsequent events to the internal audit function

Question 53

The individual responsible for the audit engagement, its performance, and for the auditor's report that is issued on behalf the firm is _______.

A)the senior audit manager
B)the audit partner
C)the Chief Executive Officer (CEO) of the client firm
D)the Chief Financial Officer (CFO) of the client firm

Question 54

Define subsequent events.

A)Events occurring between the date of the financial statements and the date of the auditor's report.
B)Events that provide evidence of conditions that arose after the date of the auditor's report.
C)Events that provide evidence of conditions that arose after the date of the financial statements.
D)Events that never require an adjustment to the financial statements but may require disclosure in the notes to the financial statements.

Question 55

The actual analytical procedures performed at the end of an audit _______.

A)should always be the same for every client in order to increase uniformity of audits
B)will depend on senior managements preferences
C)will depend on auditor judgment and may vary by client
D)will depend on auditor judgment but should be the same for each client

Question 56

The nature of the specific procedures performed for the subsequent events review _______.

A)will depend on the individual circumstances of each client
B)should be uniform across all clients, to increase consistency
C)should be agreed with management, with respect to areas to focus audit resources and effort
D)will be determined and handled by the internal audit function

Question 57

Final analytical procedures are intended

A)to corroborate audit evidence obtained during the audit only
B)to corroborate audit evidence obtained during the audit, and to confirm the financial statements are consistent with the auditor's revised expectations based on evidence evaluated during the audit
C)to refute audit evidence obtained during the audit, and to confirm the financial statements are consistent with the auditor's revised expectations based on evidence evaluated during the audit
D)to corroborate audit evidence obtained during the audit, and to confirm the financial statements are inconsistent with the auditor's revised expectations based on evidence evaluated during the audit.

Question 58

If controls are weak, _______.

A)auditors will perform less substantive testing as a result
B)auditors will increase the control risk assessment and perform additional substantive tests to detect material misstatements
C)auditors will decrease the control risk assessment and perform additional substantive tests to detect material misstatements
D)auditors will increase the control risk assessment and perform fewer substantive tests to detect material misstatements

Question 59

When fraud is discovered, _______.

A)auditors should immediately contact the Securities and Exchange Commission (SEC)
B)auditors should determine the amounts involved, and then decide whether to report the fraud to management
C)auditors gather sufficient appropriate evidence to support their conclusion
D)the matter should immediately be referred to the internal audit function

Question 60

If the auditors withdraw from an engagement, _______.

A)they will inform the appropriate level of management or those charged with governance and provide reasons for the withdrawal
B)they will inform the appropriate level of management only and will provide reasons for the withdrawal
C)the auditor should immediately cease communication with the client, and refer them to another auditor
D)they are not entitled to receive compensation for services performed

Question 61

If auditors determine there is substantial doubt about the entity continuing as a going concern, _______.

A)the next step is to obtain information about management's plans to mitigate or minimize the adverse effects of the situation
B)the next step is to obtain information about the auditor's plans to mitigate or minimize the adverse effects of the situation
C)they should immediately issue an adverse opinion and withdraw from the engagement
D)the auditors should immediately invoice the client for the cost of the audit and request payment within 30 days

Question 62

Who considers whether work has been performed in accordance with appropriate audit standards?

A)Working paper reviewer
B)Engagement partner
C)Quality control reviewer
D)Audit partner

Question 63

What is the going concern assumption?

A)The viability of an entity to remain in business for the foreseeable future
B)The period of time required by the applicable financial reporting framework
C)The responsibility to perform any audit procedures
D)An overall conclusion on the audit drawn by auditors

Question 64

With respect to the going concern assumption, auditors also draw their own conclusions _______.

A)about whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time
B)about whether there is substantial doubt about the entity's ability to continue as a going concern for an indefinite period of time
C)as to whether the client is likely to be a target for an acquisition by another company in the near future
D)as to whether the client is likely to attempt to acquire another company in the near future

Question 65

_______ are used near the end of the audit to assist the auditor in forming an overall conclusion about whether the financial statements are consistent with the auditor's understanding of the entity.

A)Analytical procedures
B)Engagement procedures
C)Quality control procedures
D)Audit standards

Question 66

An example of a factor that mitigates doubts about an entity's ability to continue as a going concern would be _______.

A)a letter of guarantee from a parent company
B)the ability to raise additional funds through the issuance of more stock
C)the ability to sell an unprofitable segment of the business
D)All of these examples are mitigating factors.

Question 67

According to Generally Accepted Accounting Principles (GAAP), to meet the "going-concern" standard an entity must be viewed as capable of staying in business for ____________ after the date of the financial statements.

A)a reasonable period of time
B)six months
C)nine months
D)two years

Question 68

The management representation letter _______.

A)can sometimes serve as a substitute for certain audit procedures that were not able to be performed
B)is a letter from management to the auditor acknowledging management's responsibility for the preparation of the financial statements
C)is a letter from the auditor to management acknowledging management's responsibility for the preparation of the financial statements
D)should only be sent to the client's legal counsel; not directly to the client

Question 69

The final step for the auditor to perform with respect to doubts about an entity's ability to remain a going concern is to communicate_______.

A)all relevant findings to the internal audit function
B)all relevant findings to common stockholders
C)with those charged with governance
D)with all preferred stockholders

Question 70

The written representation from management _______.

A)supplements the inquiries made of management regarding subsequent events and the evidence gathered from audit procedures
B)supplements the inquiries made of the auditor regarding subsequent events and the evidence gathered from audit procedures
C)can be drafted by the auditor and signed by the internal audit function on behalf of management
D)transfers legal liability for any financial statement errors to the auditor

Question 71

If auditors determine there is substantial doubt about the entity continuing as a going concern, _______.

A)then the auditor should immediately notify the Securities and Exchange Commission (SEC)
B)the next step is to obtain information about management's plans to mitigate or minimize the adverse effects of the situation
C)the next step is to obtain information about the auditor's plans to mitigate or minimize the adverse effects of the situation.
D)the next step is to ensure the client is immediately billed for all services performed, to ensure payment

Question 72

The assumption that relates to the entity continuing in business for the foreseeable future is called _______.

A)the entity assumption
B)the going concern assumption
C)the solvency assumption
D)the liquidity assumption

Question 73

With respect to the going concern assumption, under Generally Accepted Accounting Principles (GAAP), a reasonable period of time is _______.

A)considered to be 90 days
B)considered to be 180 days
C)one year from the date the client issues financial statements
D)two years from the date the client issues financial statements

Question 74

Analytical procedures during risk assessment of a going concern _______.

A)May identify negative trends such as working capital deficiencies, adverse key financial ratios, and decreasing cash flow from operations
B)May identify positive trends such as working capital deficiencies, adverse key financial ratios, and decreasing cash flow from operations
C)May identify only external matters that have occurred such as loss of a key franchise, loss of a principal customer, or work stoppages due to natural disaster
D)May identify internal matters that have occurred such as legal proceedings

Question 75

After considering management's plans, if auditors determine there is substantial doubt about the entity's ability to continue as a going concern, _______.

A)the auditor should consider withdrawing from the engagement
B)the next steps are to consider the possible effects on the financial statements and on the auditor's report
C)the next steps are to consider the possible effects on the financial statements and on the internal auditor's report
D)the auditor should attempt to locate alternative lines of debt and equity capital for the client

Question 76

At the end of the audit, which of the following is NOT reevaluated by the auditors?

A)Misstatements found during the audit
B)Materiality decisions made during the audit
C)Inherent risk based on audit findings
D)Fraud risk based on audit findings

Question 77

The going concern assumption _______.

A)is not the responsibility of the auditor, and should be left to management to determine
B)is a fundamental principle in the preparation of the financial statements
C)is the legal responsibility of the auditor
D)relates to the comparability and verifiability of a firm's financial statements

Question 78

If the auditors decide to issue a modified auditor's report due to doubt about an entity's ability to continue as a going concern _______.

A)the report should always be adverse
B)the report should always be a disclaimer of opinion
C)the matter should be communicated with those charged with governance
D)the should be communicated to the client's legal counsel for disclosure to senior management

Question 79

Responsibility for evaluating the going concern assumption in accordance with the applicable financial reporting framework rests with _______.

A)the auditor
B)management
C)the internal audit function
D)the clients legal counsel

Question 80

If management determines there is substantial doubt about continuing as a going concern, _______.

A)then management must make a note disclosure about the circumstances, including any plans management may have to mitigate the situation.
B)then management must make list an estimated loss contingency in the financial statements about the circumstances, including any plans management may have to mitigate the situation.
C)nothing should be disclosed in the notes to the financial statements until management is reasonably certain it will be an issue
D)then future debt issues will likely enjoy lower interest rates